How J.P. Morgan lost a top potential Dimon successor

NEW YORK (MarketWatch) — The recent departure of J.P. Morgan senior executive Mike Cavanagh for a new role at the Carlyle Group surprised many on Wall Street.

Bloomberg

Michael Cavanagh.

Cavanagh, once viewed as a leading candidate to succeed J.P. Morgan Chief Executive Jamie Dimon, quit his role as co-head of investment banking to become co-president and co-chief operating officer of the private -equity firm. It’s a move that has probably ended his chances of ever being offered the top job at the nation’s biggest bank should Dimon ever decide, or need, to leave. (Dimon late Tuesday revealed that he has throat cancer but said that the prognosis is excellent and that he will continue to be actively involved in the company during his treatment.)

Cavanagh joins a growing number of executives who are leaving traditional banking for private equity, according to recruitment agencies, fleeing a now highly regulated industry for a more lightly regulated one. They expect the trend to gain pace as banks continue to shed jobs and bankers squirm at the public criticism of the role they played in the financial crisis.

“What is atypical is that Jamie Dimon’s job, or any senior banking job, is no longer the trophy job in people’s minds,” said Vanessa Bailey, founder of Cressida Partners, a search firm that has spent the last 25 years recruiting talent for private equity firms. “That speaks to the regulatory pressure that exists and the negative PR around Wall Street that bankers are evil.”

The pace of recruitment into private equity has been steadily increasing since the crisis, says John Ricco, founder and partner at financial services recruitment firm The Atlantic Group, which works with some of the biggest private equity firms on Wall Street, including Fortress Investment Group, The Blackstone Group
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BlackRock Inc.
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and Bridgewater Associates LP.

Private-equity firms are generally less bureaucratic, and the working environment can be less stressful, he said. “You are talking less hours and more money,” said Ricco. “Who is not going to make the move?”

Top private equity firms

In fact, 80% of the people coming to the Atlantic Group are trying to move to hedge funds or private-equity firms from some of the largest banks on Wall Street. The boutique search firm is currently seeking to fill 500 positions, most of them in asset management, according to Ricco.

In theory, there should be plenty of experienced financial professionals available. Wall Street has shed nearly 700,000 jobs since 2007, with the peak of the bloodletting coming in 2008, according to outplacement firm Challenger, Gray & Christmas. The major banks cut 260,000 jobs that year.

Hiring is happening on all fronts in the private-equity space, from the back office to accounting and legal and capital markets divisions, according to recruiters. Private-equity firms raise funds from big institutional investors, such as pension funds, university endowments, high-net-worth individuals and family offices. They then invest the capital in companies they believe have strong growth prospects, restructure them and either sell them to a strategic buyer or take them public.

Working for a small private-equity player can mean more autonomy than working for a large multinational organization with a rigid structure, according to insiders. At a private-equity firm, you can play a significant role.

“It’s like moving from a large retailer to your own store,” said Michael Archer, partner in global financial services at Kurt Salmon, a Wall Street consulting firm. “When you are in a large organization, you have a very defined role, and after a while you get tired of that and feel like you don’t make an impact, and that can be discouraging.”

Large companies can be slow-moving, whereas small firms are more nimble.

“It’s easier to make decisions,” said Archer, “but also easier to get in trouble.”

The other key attraction is compensation. Salaries at private-equity firms tend to be 10% to 15% higher than at Wall Street banks, on average, says Ricco. They are even more extravagant at the top echelon of management.

“We are way past the days of people moving for lateral positions where the employers have all the power,” said Ricco. “The candidates are king now.”

While Wall Street firms are trimming salaries or shutting entire businesses as they struggle with falling revenue, private-equity firms are enjoying record returns, thanks to buoyant public markets in the last few years.

And a greater percentage of management fees are going to compensation, according to recruiters. Anywhere from 40% to 70% of the total management fees coming from the companies that equity firms are managing can go toward compensation.

The most established firms paid their top people handsomely in 2013.

Dimon diagnosed with throat cancer

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The chairman and chief executive of J.P. Morgan Chase told employees Tuesday that he has been diagnosed with throat cancer but that the prognosis is excellent.

The founders of KKR Inc., for example, took home more than $300 million in 2013. Stephen Schwarzman, co-founder and CEO of Blackstone, had a compensation package worth $465 million. The Carlyle Group’s three founders took home about $750 million, while Apollo Global Management LLC co-founder Leon Black took home more than $500 million. In comparison, J.P. Morgan’s
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Dimon was paid $11.8 million.

Other notable bank executives who have recently turned to hedge funds or private-equity firms include Anthony Noto, global co-head of technology banking at Goldman Sachs Group Inc.
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who quit with the intention of joining the hedge fund Coatue but instead has landed with Twitter as its CFO. Another longtime J.P. Morgan banker, Reinhard Koester, recently joined private-equity firm Aquiline Capital Partners.

Banks have come under close scrutiny with the implementation of the regulations known as Dodd-Frank. They have also been bombarded with lawsuits and investigations, mostly stemming from their mortgage-related activities in the years leading up to the financial crisis of 2008. J.P. Morgan agreed a record $13 billion settlement with the Department of Justice late last year following a series of probes targeting soured mortgage bonds.

Many banks are spending millions of dollars on compliance, and compliance officers are much in demand. There are about 11,000 compliance jobs open in the U.S. right now, according to Archer.

“About 50% of my time is spent on compliance,” said Neil Hennessy, founder of Hennessy Funds. “You have to make sure all the i’s are dotted and t’s are crossed.”

Private-equity firms are also facing greater oversight as new registration and reporting requirements are implemented across the globe.

“The regulatory scrutiny is clearly migrating,” said Archer. “To some degree the private-equity firms are looking to Wall Street bank executives who have that experience.”

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